Idea Watch

In 1985 WPP was a small, publicly traded company, worth about $1.3 million. It manufactured shopping carts and other wire and plastic products. Today it is the world’s largest advertising and marketing services company, worth about $30 billion. Sorrell details how that growth occurred and why it continues, even in an industry with constraints on the top line.

Within two years of buying WPP, which he always intended to use as a shell company, Sorrell and his team had made 18 acquisitions, focusing on firms that specialized in “below the line” marketing functions: packing, design, and promotions. (“ ‘Above the line,’ ” he writes, “is the sexy, creative, Don Draper stuff.”) They went on to acquire J. Walter Thompson and Ogilvy & Mather in deals worth a combined $1 billion plus. When the economy went into recession, WPP found itself overleveraged; the author concluded that he needed to justify the parent company’s existence. The leadership team focused on investments in its people and in real estate and launched a number of programs to cultivate and retain talent. It colocated operating companies in multiple markets throughout the world, centralized procurement, and standardized hardware and software across the group. Its effort to create horizontality, which has accelerated over the past decade, gives clients access to the best talent and ideas from WPP’s entire portfolio and keeps the company growing.

Features

Most observers who have written about holacracy and other forms of self-management take extreme positions, either celebrating these “bossless,” “flat” work environments for fostering flexibility and engagement or denouncing them as naive experiments that ignore how things really get done. To gain a more accurate, balanced perspective, the authors—drawing on examples from Zappos, Morning Star, and other companies—examine why these structures have evolved and how they operate, both in the trenches and at the level of enterprise strategy and policy.

Self-organization models typically share three characteristics:

Teams are the structure. Within them, individual “roles” are collectively defined and assigned to accomplish the work.

Teams design and govern themselves, while nested within a larger structure.

Leadership is contextual. It’s distributed among roles, not individuals, and responsibilities shift according to fit and as the work changes.

Adopting self-management wholesale—using it to determine what should be done, who should do it, and how people will be rewarded across an entire enterprise—is hard, uncertain work, and the authors argue that in many environments it won’t pay off. But their research and experience also suggest that elements of self-organization can be valuable tools for companies of all kinds, and they look at circumstances where it makes more sense to blend the new approaches with traditional models.

Spotlight

After Wall Street firms repeatedly had to shell out millions to settle discrimination lawsuits, businesses started to get serious about their efforts to increase diversity. But unfortunately, they don’t seem to be getting results: Women and minorities have not gained much ground in management over the past 20 years.

The problem is, organizations are trying to reduce bias with the same kinds of programs they’ve been using since the 1960s. And the usual tools—diversity training, hiring tests, performance ratings, grievance systems—tend to make things worse, not better. The authors’ analysis of data from 829 firms over three decades shows that these tools actually decrease the proportion of women and minorities in management. They’re designed to preempt lawsuits by policing managers’ decisions and actions. But as lab studies show, this kind of force-feeding can activate bias and encourage rebellion.

However, in their analysis the authors uncovered numerous diversity tactics that do move the needle, such as recruiting initiatives, mentoring programs, and diversity task forces. They engage managers in solving the problem, increase contact with women and minority workers, and promote social accountability. In this article, the authors dig into the data, executive interviews, and several examples to shed light on what doesn’t work and what does.

Most diversity training programs are a waste of money, says Iris Bohnet. Companies often conduct programs without ever measuring their impact. And unfortunately, research on their effectiveness shows they seldom change attitudes, let alone behavior.

The solution? Focus on processes, not people. Behavioral science tells us that it’s very hard to eliminate our biases, but we can redesign organizations to circumvent them. Behavioral design makes it easier to do the unbiased thing by either preventing biased choices or changing people’s beliefs.

Companies can start by collecting data on their current diversity training. Then they must bring the same rigor to people management that they apply to financial and marketing decisions. This means defining the desired change, implementing new programs, collecting hard data, and evaluating the results.

Even simple changes can be effective. For example, hiring managers can use software that allows them to strip age, gender, socioeconomic background, and similar information out of résumés so that they focus only on talent.

Bias affects everyone, despite efforts at awareness and the best of intentions. The good news, says Bohnet, is that behavioral design can break the link between our gut reactions and our actions, and allow our biased minds to get things right.

Decades’ worth of studies show that a diverse workforce measurably improves decision making, problem solving, creativity, innovation, and flexibility. But most of us also believe that hiring, development, and compensation decisions should come down to merit. Although the two ideas don’t seem contradictory, they’re tough to reconcile in practice. Cognitive roadblocks keep getting in the way.

The author looks at recent books and research studies on the subject, including Success and Luck: Good Fortune and the Myth of Meritocracy, by Robert H. Frank, and Pedigree: How Elite Students Get Elite Jobs, by Lauren A. Rivera. Frank points out, for example, that hindsight bias causes us to believe that random events are predictable and to manufacture explanations for the inevitability of our achievements. And winner-take-all markets intensify the consequences of our cognitive shortcuts. Rivera studied hiring committees at professional services firms that believed they were ensuring rigor and counteracting bias through group discussions of job candidates from the school-recruitment pipeline. But those conversations actually dampened diversity by giving negative racial, ethnic, and gender stereotypes greater sway over decisions.

Features

In a perfect world, investors, board members, and executives would have full confidence in companies’ financial statements. They could rely on the numbers to make intelligent estimates of the magnitude, timing, and uncertainty of future cash flows and to judge whether the resulting estimate of value was fairly represented in the current stock price. And they could make wise decisions about whether to invest in or acquire a company, thus promoting the efficient allocation of capital.

Unfortunately, that’s not what happens in the real world, for several reasons. First, financial statements necessarily depend on estimates and judgment calls that can be widely off the mark, even when made in good faith. Second, standard financial metrics intended to enable comparisons from one company to another often fall short, giving rise to unofficial measures that have their own problems. Finally, executives routinely face strong incentives to manipulate financial statements.

In recent years, we’ve seen the implosion of Enron, the passage of the Sarbanes-Oxley Act, the 2008 financial crisis, the adoption of the Dodd-Frank regulations, and the launch of a global initiative to reconcile U.S. and international accounting regimes. Meanwhile, the growing importance of online platforms has dramatically changed the competitive environment for all businesses.

In this article, the authors examine the impact of those developments and consider new techniques to combat the gaming of performance numbers.

The United States stands at a crossroads in how to pay for health care. Fee for service, the dominant payment model in the U.S. and many other countries, is now widely recognized as perhaps the single biggest obstacle to improving health care delivery. A battle is currently raging, outside of the public eye, between the advocates of two radically different payment approaches: capitation and bundled payments. The stakes are high, and the outcome will define the shape of the health care system for many years to come, for better or for worse.

In this article, the authors argue that although capitation may deliver modest savings in the short run, it brings significant risks and will fail to fundamentally change the trajectory of a broken system. The bundled payment model, in contrast, triggers competition between providers to create value where it matters—at the individual patient level—and puts health care on the right path.

The authors provide robust proof-of-concept examples of bundled payment initiatives in the U.S. and abroad, address the challenges of transitioning to bundled payments, and respond to critics’ concerns about obstacles to implementation.

Recent studies suggest that at least 35%—and maybe over 50%—of all health care spending in the U.S. is wasted on inadequate, unnecessary, and inefficient care and suboptimal business processes. But efforts to get rid of that waste face a huge challenge: Under current payment methods, the providers who develop more-cost-effective approaches don’t receive any of the savings. Instead, the money goes mainly to insurers. The providers, who are paid for the volume of services delivered, end up actually losing money, which undermines their finances and their ability to invest in more cost-saving innovations.

To address this quandary, say two top execs from the nonprofit Intermountain Healthcare system, we need a different way to pay for health care: population-based payment. PBP gives care delivery groups a fixed per-person payment that covers all of an individual’s health care services in a given year. Under it, providers benefit from the savings of all efforts to attack waste, encouraging them to do it more. And though PBP may sound similar to the HMOs of the 1990s, there are significant twists: Payments go directly to care delivery groups, and patients’ physicians—not insurance companies—assume responsibility for overseeing and managing the cost of treatment. Provider groups are also required to meet quality standards that further protect patients.

By applying PBP in just part of its system, Intermountain, which serves 2 million people, has been able to chop $688 million in annual waste and bring total costs down 13%.

Experience

People, including negotiators, lie every day, so when you’re trying to make a deal, it’s important to defend against deception. The best strategy, says the author, is to focus not on detecting lies but on preventing them. She outlines five tactics that research has shown to be effective:

Encourage reciprocity.

You can build trust and prompt other parties to disclose strategic information by sharing information yourself.

Ask the right questions.

Negotiators often lie by omission, keeping mum about relevant facts, but if directly asked, they are more likely to respond honestly.

Watch for dodging.

Don’t let your counterparts sidestep your questions—write them down in advance, take notes on the answers, and make sure you get the information you’re seeking.

Don’t dwell on confidentiality.

Studies show that the more you reassure others that you’ll protect their privacy, the more guarded and apt to lie they become. So be nonchalant when discussing sensitive topics.

Cultivate leaks.

People often reveal information unwittingly, so listen carefully for any slips and try indirect approaches to gaining information.